A.R. Balakrishnan vs Commissioner of Income Tax

Ramanujam, J.—One Balakrishnan was originally a member of a Hindu undivided family along with the father and brothers, The said Hindu

undivided family owned business of the ""Balakrishna Mills"". There was a partition in the said family in 1946, and after this partition the family

business was converted into a private limited company. The shareholders of the said private limited company were the members of the erstwhile

Hindu undivided family, the total number of equity shares being 3,601, held by them as follows :

A. H. S. Ramaswamy (Father) 700 shares

A. H. S. R. Rukmani Ammal (Mother) 101

A. R, Balakrishnan 700

A. R. Ramakrishnan 700 ,,

A. R. Radhakrishnan 700

A. R. Rathinam 700

The father, Ramaswamy, was the first managing director of the company as per Article 93 of the articles of association. After his death in 1951,

his eldest son, Balakrishnan, was elected as the managing director on September 30, 1952. The shareholding of Balakrishnan, his mother and

brothers after the death of the father, was as follows:

A. H. S. R. Rukmani Ammal 241 shares

A. R. Balakrishnan 840

A. R. Ramakrishnan 840 ,,

A. R. Radhakrishnan 840 ,,

A. R. Rathinam 840

The share income from the company as well as the remuneration received by Balakrishnan as managing director of the company were being

assessed in his hands as an individual up to the assessment year 1957-58. On March 31,1958, a son was born to him and from the assessment

year 1958-59 onwards, till the assessment year 1962-63, the share income from the company was assessed in the -hands of the Hindu undivided

family consisting of Balakrishnan and his son and the remuneration received by Balakrishnan as managing director was assessed in his hands as an

individual.

However, for the first time in the assessment year 1963-64, the income tax Officer took the view that the remuneration received by

Balakrishnan as managing director of the company ought to have been assessed in the hands of the Hindu undivided family of Balakrishnan and his

son. He, therefore, reopened the assessments for the years 1959-60 to 1962-63 and following the decision of the Supreme Court in The

Commissioner of Income Tax, West Bengal Vs. Kalu Babu Lal Chand, and of this court in Commissioner of Income Tax, Madras Vs. S. RM.

CT. PL. Palaniappa Chettiar, he included the remuneration received by the karta as managing director of the mills in the income of the Hindu

undivided family consisting of himself and his son. On the same ground the original assessments for 1963-64 and 1964-65 were also completed

including the remuneration of the karta as managing director in the income of the Hindu undivided family.

The Hindu undivided family, the assessee, preferred appeals to the Appellate Assistant Commissioner against the orders of the Income Tax

Officer and contended, firstly, that the reopening of the original assessments for the assessment years 1959-60 to 1962-63 was illegal, and,

secondly, that the inclusion of the remuneration earned by the karta as managing director of the company in the income of the Hindu undivided

family was not legal. The Appellate Assistant Commissioner rejected both the contentions. He held that the decision in Commissioner of Income

Tax, Madras Vs. S. RM. CT. PL. Palaniappa Chettiar, case was in the nature of information justifying the reopening of the original assessments

and that the assessment of remuneration in the hands of the Hindu undivided family was also justified in the light of the decisions of the Supreme

Court and of this court above referred to.

The assessee preferred appeals to the Appellate Tribunal contending that the reassessment proceedings u/s 147 in respect of the assessment

years 1959-60 to 1962-63 were illegal and that the assessment of the remuneration received by the karta as the managing director of the company

in the hands of the Hindu undivided family was not justified. As regards the first contention, the Tribunal held that the original assessments were

made on the basis of the decision of this court in The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, which is inconsistent with the

decision of the Supreme Court in The Commissioner of Income Tax, West Bengal Vs. Kalu Babu Lal Chand, case and, therefore, the original

assessments being based upon an erroneous rule of law, the correct position of law as enunciated by this court in Palaniappa Chettiar''s case

amounted to information within the meaning of Section 147(b) and that, therefore, the reassessment proceedings were quite valid. As regards the

second contention, it was urged by the assessee that, at the point of time when Balakrishnan became the managing director of the company, the

Hindu undivided family had no claims over the remuneration earned by the karta and that the remuneration earned by Balakrishnan had no relation

to the holding of the shares in the company by the family. The Tribunal observed that out of 840 shares held by Balakrishnan, 700 shares were

obtained by him in the partition between himself and his father and brothers and the remaining 140 shares came to him by way of inheritance on the

death of his father and that, therefore, all the said 840 shares were ancestral and had become the joint family property of himself and his son. In

support of this view the Tribunal relied on the decision of the Supreme Court in Gowli Buddanna Vs. Commissioner of Income Tax, Mysore,

Bangalore, .

As regards the other contention that the remuneration earned by Balakrishnan as managing director of the company has no relation with the family,

the Tribunal observed that the managing director of the company can be appointed only from and out of the directors of the company, that in order

to become a director one has to hold at least 100 shares of the company in his own right, that it was open for a company to prescribe such

qualification for the director, that Balakrishnan was appointed as managing director only because he possessed the basic qualification and he

continued to hold that office since the family continued to hold the required number of shares, that, therefore, the holding of the office of the

managing director by Balakrishnan was dependent upon the holding of the minimum number of shares of the company by the family and that the

principle laid down by the Supreme Court in The Commissioner of Income Tax, West Bengal Vs. Kalu Babu Lal Chand, case has to be applied

and the remuneration received by the karta as managing director of the company has to be treated as income of the Hindu undivided family. At the

instance of the assessee the following questions have been referred to this court:

(1) Whether, on the facts and in the circumstances of the case, the Income Tax Officer was competent to reopen the original assessments for the

years 1959-60 to 1962-63, u/s 147(b) of the Income Tax Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the remuneration received by Sri A. R. Balakrishnan from Balakrishna Mills Private

Ltd., during the assessment years 1959-60 to 1964-65, constituted the income of the assessee, Hindu undivided family ?

On a due consideration of the matter we are of the view that the first question has to be answered in the affirmative and against the assessee. As

pointed out by the Tribunal the original assessments for the assessment years 1959-60 to 1962-63 proceeded on the basis of the decision of this

court in The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, . In Commissioner of Income Tax, Madras Vs. S. RM. CT. PL.

Palaniappa Chettiar, this court had held that the decision in Sankaralinga Iyer''s case stands overruled by the decision of the Supreme Court in

Kalu Babu Lal Chand''s case. The decision in Palaniappa Chettiar''s case had been rendered by this court only after the original assessments for

the above assessment years had been made. Therefore, the decision in Palaniappa Chettiar''s case can be taken as constituting ""information"" within

Section 34(1)(b) of the Indian Income Tax Act, 1922, corresponding to Section 147 of the Income Tax Act, 1961, so as to enable the Income

Tax Officer to initiate reassessment proceedings. We are, therefore, of the view that the reassessment proceedings are valid in this case.

Then we come to the second question. The assessee contends that the inclusion of the remuneration earned by the karta, Balakrishnan, as

managing director of the company in the income of the assessee family was illegal and that the said remuneration has to be assessed only in the

hands of the karta as an individual. It is pointed out by the assessee that at the point of time when Balakrishnan became the managing director of

the company the Hindu undivided family did not come into existence and as such it was not the owner of any shares in the company at that time

and therefore the shares becoming the property of the Hindu undivided family at a later stage will not make the appointment as one in favour of the

family and the remuneration paid to the managing director the income of the Hindu undivided family and that the remuneration earned by the karta

as managing director had no relation to the holding of the shares by the Hindu undivided family. As already stated, Balakrishnan became the

managing director of the company from October 1, 1952. But a son was born to him only on March 31, 1958, and the joint family as such came

into existence only from the date when the son was born to him. Having regard to the mode of the acquisition of the shares by Balakrishnan, it

cannot be disputed that they were ancestral in character even before the son was born to him. After the birth of the son the shares admittedly

became the property of the Hindu undivided family of himself and his son. There is no force or substance in the contention of the assessee that the

original acquisition of the qualifying shares by Balakrishnan and his becoming a director by reason of such holding was not with the joint family

funds and, therefore, was not to the detriment of the family. Though the acquisition of the qualifying shares was not by the Hindu undivided family

still the continuance of Balakrishnan as managing director was only on the basis of the qualifying shares held by the Hindu undivided family and,

therefore, it could be said that the holding of shares by the family was the basis for the continuance of Balakrishnan as a managing director. As

pointed out by this court in T. T. Rathnasabapathy Pillai v. Commissioner of Income Tax [1966] 62 ITR 358 the applicability of the doctrine of

detriment need not be confined to the stage of the original acquisition, and there is no reason why such a case of deriving income by a member of a

Hindu undivided by utilisation directly or indirectly of its funds or assets cannot be brought in within the said doctrine. We, therefore, proceed on

the basis that the continuance of Balakrishnan as the managing director is dependent on the holding of the qualifying shares of the Hindu undivided

family. The learned counsel for the assessee did not in fact dispute the fact that the continuance of the karta as the managing director of the

company was dependent upon the qualifying shares held by the Hindu undivided family as per articles of association of the company.

But what is urged on behalf of the assessee is that Article 71 which provides for the share qualification of directors cannot be enforced in view

of Section 273 of the Companies Act. Under Article 97 of the articles of association of Balakrishna Mills Ltd., a managing director can be

appointed from out of the directors of the company and in order to become a director one had to hold at least 100 shares of the company in his

own right as per Article 71. It is true that Section 273 the Companies Act, 1956, exempted private companies from the operation of Section 270

of the said Act which deals with the question of share qualification for becoming a director. But it is open to a company to prescribe a share

qualification for its directors and that cannot be taken to be in conflict with the provisions of the Companies Act. It is not in dispute that in this case

the articles of association were not modified after the coming into force of the Companies Act of 1956 during the assessment years in question. We

cannot, therefore, agree with the assessee that it is not necessary for a managing director to hold the minimum number of shares referred to in

Article 71 of the articles of association.

It is in the light of this admitted position we have to see whether the remuneration as managing director received by the karta of the Hindu

undivided family is the income of the Hindu undivided family. The learned counsel for the assessee would contend that even if the continuance of

the karta as managing director of the company was dependent upon the Hindu undivided family holding the required shares, still the remuneration

received by the karta cannot be taken to be the income of the Hindu undivided family in view of the decision of the Supreme Court in Shri Raj

Kumar Singh Hukam Chandji Vs. Commissioner of Income Tax, Madhya Pradesh, . In that case the Supreme Court had considered almost all the

earlier decisions on the point and expressed :

At first sight there appears to be conflict between the two lines of decisions, namely, The Commissioner of Income Tax, West Bengal Vs. Kalu

Babu Lal Chand, , Mathura Prasad Vs. Commissioner of Income Tax, Uttar Pradesh, , the two V.D. Dhanwatey Vs. The Commissioner of

Income Tax, M.P. Nagpur, and M.D. Dhanwatey Vs. Commissioner of Income Tax, Madhya Pradesh, Nagpur and Bhandara, and P.N. Krishna

Iyer Vs. Commissioner of Income Tax, Kerala, and S. RM. CT. PL. Palani Appa Chettiar Vs. The Commissioner of Income Tax, Madras, case,

Commissioner of Income Tax, Mysore Vs. Gurunath V. Dhakappa, and Commissioner of Income Tax, Mysore Vs. D.C. Shah, on the other. The

line that demarcates these two lines of decisions is not very distinct but on a closer examination that line can be located. In order to find out

whether a given income is that of the person to whom it was purported to have been given or that of his family, several tests have been enumerated

in the aforementioned decisions but none of them excepting The Commissioner of Income Tax, West Bengal Vs. Kalu Babu Lal Chand, makes

reference to the observations of Lord Sumner in Gokul Chand''s case, AIR 1921 P.C. 35 that ''in considering whether gains are partible, there is

no valid distinction between the direct use of the joint family funds and a use which qualifies the member to make the gains by his own efforts''. We

think that that principle is no more valid. The other tests enumerated are :

(1) Whether the income received by a coparcener of a Hindu undivided family as remuneration had any real connection with the investment of the

joint family funds ?

(2) Whether the income received was directly related to any utilisation of family assets ?

(3) Whether the family had suffered any detriment in the process of realisation of income ? and

(4) Whether the income was received with the aid and assistance of the family funds ?

The Supreme Court culled out a broader principle from the tests referred to above that if the remuneration received by a coparcener in

substance though not in form was but one of the modes of return made to the family because of the investment of the funds of the family in the

family business, it is an income of the Hindu undivided family, but if it is a. compensation made for the services rendered by the individual

coparcener, it will be the income of the individual coparcener. If the income was essentially earned as a result of the funds invested by the family,

the fact that a coparcener has rendered some service would not change the character of the receipt. If, on the other hand, it is essentially a

remuneration for the services rendered by a coparcener, the circumstances that his services were availed of because of the reason that he was a

member of the family which had invested funds in that business or that he had obtained the qualification shares from out of the family funds would

not make the receipt the income of the Hindu undivided family. Applying the said broad principle the Supreme Court held in that case that the

assessee did not become the managing director of the firm for the mere reason that his family had purchased considerable shares in the firm, that he

was elected as a managing director by the board of directors, that he received his salary for personal services rendered, that there was no material

to show that he was elected managing director on behalf of the family and that, therefore, the remuneration received by the managing director

cannot be treated as the income of the Hindu undivided family. The above decision definitely supports the assessee''s contention in this case.

The learned counsel for the revenue, however, points out that the earlier decisions of the Supreme Court have held to the contrary on the same

set of facts and that, therefore, these decisions ought to be followed in preference to the above decision. But, as we find that the Supreme Court in

the above case has considered all its earlier decisions including The Commissioner of Income Tax, West Bengal Vs. Kalu Babu Lal Chand, and S.

RM. CT. PL. Palani Appa Chettiar Vs. The Commissioner of Income Tax, Madras, and culled out the principles referred to above from those

decisions, we think it unnecessary to consider every one of those earlier decisions. It is true that some of the earlier decisions proceed on the basis

that the remuneration received by a managing director was purely for services rendered and others have proceeded on the basis that as the

qualification shares are held by the Hindu undivided family, the remuneration received by a coparcener should be taken to be the income of the

Hindu undivided family. Some cases have also proceeded only on the basis of the detriment to the family. But after considering all these decisions,

the Supreme Court has laid down a broad and uniform principle in Prem Nath and Others Vs. Commissioner of Income Tax, Delhi and Rajasthan,

that if the remuneration received by a coparcener is one of the modes of return for the investment made by the family it should be taken as the

income of the family, that is, if the income was essentially earned as a result of the funds invested by the family, the income will be that of the family.

We, therefore, proceed to apply the tests laid down by the Supreme Court in the above case to the facts of this case.

In this case, as already pointed out, the original acquisition of the qualification shares was not with the funds of the joint family though the shares

became the property of the Hindu undivided family after a son was born to Balakrishnan. It is true the continuance of Balakrishnan as managing

director is dependant upon the family holding the required number of shares. But the holding of the shares by the Hindu undivided family cannot be

taken to be a conclusive factor in view of the said decision of the Supreme Court. In this case, after the death of the father, the previous managing

director, out of the four sons holding 840 shares each, Balakrishnan has been elected as the managing director. The resolution appointing him as

the managing director does not show that he has been elected as managing director on behalf of his family. The appointment could not have been

on behalf of the family as there was no joint family on the relevant date. He cannot also be said to have become managing director of the company

only for the reason that his family owns 840 shares, for the other three brothers owned the same number of shares as Balakrishnan''s family holds

and if that 840 shares held by Balakrishnan alone is the reason for his being elected as the managing director, the other three brothers who owned

the same number of shares are entitled to claim to be appointed as managing director. Therefore, it is not possible to say that Balakrishnan has

been elected as managing director merely because he was holding 840 shares in the company. When an election to the managing director has

taken place as between the persons holding equal number of shares, it cannot be said that the election of one of them was only because he held

840 shares in the company. Further, the main test propounded by the Supreme Court in the above decision is to see whether the remuneration

received by Balakrishnan is in substance one of the modes of the return for the shares held by the family. As already stated, in this case, there are

three other persons who owned the same number of shares each and if the remuneration is treated as a return for the shares held by Balakrishnan''s

family, then the other brothers will also be entitled to claim equal return for their investments. We, therefore, feel that the remuneration received by

Balakrishnan in this case cannot be treated as a return for the shares held by the family.

It is urged by the revenue that there is no evidence in this case to show that the remuneration has been paid for any personal service rendered

by Balakrishnan as the managing director, and that even the articles of association proceed on the basis that the managing director will be entitled

to his remuneration of Rs. 1,500 per month without doing any service to the company. We are not inclined to agree with the said contention.

Article 93 of the articles of association states that the affairs and business of the company shall be managed by the managing director, who shall

have the authority to exercise all the powers, authorities and discretions vested in the directors generally by the articles. Article 94 provides a

monthly remuneration of Rs. 1,500 per month to the managing director and Article 95 provides a commission on the net profits of the company in

addition to the monthly remuneration provided under Article 94. In this case the assessee, right from the beginning, contended that the

remuneration was paid to Balakrishnan for the actual services rendered but the authorities below have proceeded on the basis that even if services

have been rendered, the remuneration will have to be treated as income of the family for the reason that the family owns the qualification shares.

Therefore, the authorities have not specifically found that no services were rendered by Balakrishnan to the company as managing director and that

the payment of remuneration came to be made only by reason of the family holding the required number of shares. On the facts of this case it can

easily be held that the remuneration was for actual services rendered. Apart from Balakrishnan there are three other directors who held equal

number of shares and it is not likely that they would have allowed him to draw Rs. 1,500 a month and a commission of 10% of the net profits

without doing any services for the company. Besides, the normal presumption is that the managing director attends to the affairs and conducts the

business of the company, and unless there is positive evidence to show, that no services have been rendered by the managing director it is to be

presumed that Balakrishnan as managing director did Conduct the business of the company and the remuneration is referable to those services. In

our view the decision of the Tribunal cannot be said to be in accord with the decision of the Supreme Court in Shri Raj Kumar Singh Hukam

Chandji Vs. Commissioner of Income Tax, Madhya Pradesh, . We, therefore, answer the second question in the negative and against the revenue.

The revenue will pay the costs of the assessee. Counsel''s fee Rs. 250.